STATEMENT OF JAMES H. WOODY, EXECUTIVE VICE PRESIDENT, UNION TELEPHONE CO., MOUNTAIN VIEW, WY ON BEHALF OF THE UNITED STATES TELEPHONE ASSOCIATION Mr. WOODY. I am pleased to testify on behalf of Union Telephone Co. and the United States Telephone Association, USTA. USTA is the primary trade association of the local exchange carrier industry, representing over 1100 members, approximately half of which are family-controlled businesses. As a small businessman, I appreciate the opportunity to present views on estate valuation freezes and Chairman Rostenkowski's estate freeze discussion draft. I am executive vice president of Union Telephone Co., a family-controlled telephone company that serves 2,900 customers in Wyoming, Utah and Colorado. Like many others, I believe that repeal of section 2036(c) is necessary. While most would agree that some legislation is necessary to prevent valuation abuses in family transfer-of-control transactions, current section 2036(c) makes it extremely difficult, if not impossible, for older generations to continue to be involved in the business, which may be essential to the continued success of the business. Section 2036(c) is overly broad and unworkable and causes confusion. I therefore believe that if legislation is required to curb valuation abuses, it should be more equitable, narrower in scope and simpler in its application than section 2036(c). The discussion draft bill appears to me to be a step in this direction, although I understand the experts find the bill to be too broad. I willingly defer to those more versed in the estate and gift tax field to discuss the technical issues with you. I am most concerned with those sections of the bill dealing with situations where the older generation begins to turn over control and active management of a family business to the younger generation. This is basically what my father wishes to do with our family business. My grandfather founded our company in 1914. For three generations, my family has been meeting the telecommunications needs of our customers. Today, my father, mother, wife, two brothers, sister, son and nephew work for the company. We also employ nearly 30 others from the local community. The family owns 67 percent of the company stock. The rest is held by others in our community. We are not a wealthy company. All of our net operating profit goes back into our plant, equipment and services. In fact, we have never paid a dividend to any of our shareholders. My father, who is 68 years old, currently controls the company, but would eventually like to transfer control, over time, to my brothers, sister and me. Under current 2036(c), we understand that such a transfer would be complicated and, perhaps, not economically viable, if my father wanted to continue to be involved with the business which, at this time, is necessary. If we cannot make such a transfer, the family would, at some point, be forced to sell the business. We do not want to sell. Like many small telephone companies, we have made a commitment to our customers and our community. For example, to adequately serve our customers, we have invested $5,000 in equipment per customer. I believe that a transfer of our company by my father to the younger generations would be viable under the draft bill which, by and large, takes a fair approach to the valuation issues involved in a transfer. I would, however, like to focus on a few areas where I believe the draft bill must be improved. First, I understand that a transferring shareholder, such as my father, would have to receive a so-called qualified fixed payment with respect to any interest he might retain in preferred stock of the company. Such a fixed payment is based on the assumed value of the retained preferred stock. I understand that, in fixing such value, only certain types of retained rights are given value, while all other rights and payments are ignored and valued at zero. This appears to us to be the wrong approach. If the abuse in family transfers has been the overvaluation of the preferred stock kept by the older generation attributable to what are called bells and whistles features, then no value should be assigned to them. But, on the other hand, all other rights and payments should be valued on a willing seller/willing buyer basis. In other words, the bill should define what does not have value, rather than to give an overly narrow definition of what does have value. This approach would more accurately reflect reality. I also believe that a safe harbor that would put a specified value on the stock retained by the older generation if certain dividend requirements were met would be useful. I am also concerned about the deemed gift provision of the draft bill. As I understand it, in the context of a company recapitalization, such a provision would treat the failure by a business to pay dividends to the preferred stockholder as a gift by that stockholder to the holders of the common stock. But it would be inequitable to penalize a small business if it is unable to pay dividends due to downturns in the economy or setbacks suffered by the business itself. Also, if the business was able to pay a dividend and chose not to, it is my understanding that a gift could be deemed to have been made under other provisions of the code. Therefore, the deemed gift rule of the bill seems to serve no legitimate economic function and creates a real element of uncertainty. Finally, I understand that the task force has recommended that the bill delete all references to buy-sell agreements. I agree. I believe we are willing to pay an appropriate tax on these transfers, but only ask that it be structured in a way that does not threaten our viability as business people. Thank you very much for your time. STATEMENT OF JAMES H. WOODY EXECUTIVE VICE PRESIDENT THE UNITED STATES TELEPHONE ASSOCIATION BEFORE THE COMMITTEE ON WAYS AND MEANS U.S. HOUSE OF REPRESENTATIVES APRIL 24, 1990 Mr. Chairman and Members of the Committee: I am pleased to testify on behalf of Union Telephone Company and the United States Telephone Association (USTA). USTA is the primary trade association of the local exchange carrier industry, representing over 1100 members, approximately half of which are family-controlled businesses. As a small businessman, I appreciate the opportunity to present views on estate valuation freezes and Chairman Rostenkowski's estate freeze discussion draft. I am executive vice president of Union Telephone Company, a family-controlled telephone company that serves 2,900 customers in Wyoming, Utah and Colorado. Like many others, I believe that repeal of Section 2036 (c) is necessary. While most would agree that some type of legislation is necessary to prevent valuation abuses in family transfer-of-control transactions, current Section 2036 (c) makes it extremely difficult, if not impossible, for older generations to pass family businesses to younger generations in an orderly and economical fashion. It makes it very difficult for the older generation to continue to be involved in the business, which may be essential to the continued success of the business. Section 2036 (c) is overly broad and unworkable and causes confusion among not only lawyers and legislators, but businessmen as well. I therefore believe that if legislation is required to curb valuation abuses, it should be more equitable, narrower in scope and simpler in its application than Section 2036(c). The Draft Discussion Bill appears to me to be a step in this direction, although I understand the experts find the Bill to be too broad. I willingly defer to those more versed in the estate and gift tax field to discuss the technical issues with you. I am most concerned with those sections of the Bill dealing with situations where the older generation begins to turn over control and active management of a family business to the younger generation, and hopes to continue the process over a reasonable period of time. This is basically what my father wishes to do with our family business. My grandfather founded our company in 1914. For three generations, my family has been meeting the telecommunications needs of our customers. Today, my father, mother, wife, two brothers, sister, son and nephew work for the company. We also employ nearly 30 others from the local community. The family owns sixty-seven percent of the company stock. The rest is held by others in our community. We are not a wealthy company. All of our net operating profit goes back into our plant, equipment and services. In fact, we have never paid a dividend to any of our shareholders. My father, who is 68 years old currently controls the company, but would eventually like to transfer control, over time, to my brothers, sister and me. Under current 2036 (c), we understand that such a transfer would be complicated and, perhaps, not economically viable, if my father wanted to continue to be involved with the business which, at this time, is necessary. If we cannot make such a transfer, the family would, at some point, be forced to sell the business. We do not want to sell. Like many small telephone companies we have made a commitment to our customers and our community. For example, to adequately serve our customers, we have invested $5,000 in equipment per customer. I believe that a transfer of our company by my father to the younger generations would be viable under the Draft Bill which, by and large, takes a fair approach to the valuation issues involved in a transfer. I would, however, like to focus on a few areas where I believe the Draft Bill must be improved. First, I understand that a transferring shareholder, such as my father, would have to receive a so-called "qualified fixed payment" with respect to any interest he might retain in preferred stock of the company. Such a fixed payment is based on the assumed value of the retained preferred stock. I understand that in fixing such value, only certain types of retained rights are given value, while all other rights and payments are ignored and valued at zero. This appears to us to be the wrong approach. If the abuse in family transfers has been the overvaluation of the preferred stock kept by the older generation attributable to what are called "bells and whistles" features, then no value should be assigned to them. I think this approach should be taken if conversion rights of preferred stock are merely illusory or if the right to require a liquidation of the company will, in all likelihood, never occur. But, on the other hand, all other rights and payments should be valued on a willing seller willing buyer basis. In other words, the Bill should define what does not have value, rather than to give an overly narrow definition of what does have value. This approach would more accurately reflect economic reality and thereby place a more realistic value on the retained preferred stock. It could make the qualified fixed payments less onerous on the younger generation and help to keep the business functioning effectively. I also believe that a safe harbor that would put a specified value on the stock retained by the older generation if certain dividend requirements were met, would be useful. I understand that such a recommendation has been made by the Task Force of the American Bar Association and the American College of Probate Counsel. I am also concerned about the deemed gift provision of the Draft Bill. As I understand it, in the context of a company recapitalization, such a provision would treat the failure by a business to pay dividends to the preferred stockholder as a gift by that stockholder to the holders of the common stock. Clearly, when the transaction is made, there is every intention to pay the preferred shareholder the required dividends. But, it would be inequitable to penalize a small business if it is unable to pay dividends due to downturns in the economy or setbacks suffered by the business itself. Also, if the business was able to pay a dividend and simply chose not to, it is my understanding that a gift could be deemed to have been made under other provisions of the Code. Therefore, the deemed gift rule of the Bill seems to serve no legitimate economic function and creates a real element of uncertainty that would inhibit family transfers. I Finally, I understand that the Task Force has recommended that the Bill delete all references to buy-sell agreements. agree. As with the deemed gift problem, abuses in buy-sell agreements can apparently be dealt with through other provisions of the Code. The provisions contained in the Bill would only serve to create an extra burden, both on our time and on our finances. The only real beneficiaries are the lawyers and appraisers who would be needed to review and revalue the agreements every three years. Frankly, it is that kind of diversion from our business duties that turns willing taxpayers into frustrated and sometimes angry constituents. I believe we are willing to pay an appropriate tax on these transfers, but only ask that it be structured in a way that does not threaten our viability as business people. Thank you very much for your time. |